Japan takes aim at oil-linked LNG pricing

The Japanese government is pulling out all stops to shake off the oil price link that has long governed its liquefied natural gas supplies, as it seeks to relieve its struggling economy of a $US40 billion post-Fukushima energy impost.

The country’s powerful Ministry of International Trade and Industry (MITI) is urging utilities to seek cheaper oil and gas supplies, as well as encouraging the idea of LNG trading hubs and a futures market to increase pricing flexibility, a top Japanese energy bureaucrat said at a conference in Houston.

Japan’s efforts include backing the development of new methane hydrate technology for the longer term and challenging the legality of the strict long-term fixed-price contracts that govern much of Australia’s LNG sales to Japan and Korea.

…Mr Tanaka told the LNG 17 conference that the oil price link that caused Japan to pay high prices to suppliers from Australia only came about because Japan originally sought LNG to replace oil supplies, but that was “no longer the case”.

“Asia needs more gas for economic growth, so a new pricing formula is needed to accommodate the new reality” in which economic growth, sustainability and energy security were the priorities.

Australia’s big projects have fixed contracts but many also have price negotiation provisions. More to the point, it will more supply from the US, Canada and other sources to sign new contracts on new benchmarks to really apply the pressure.

I remain of the view that we’ll end up with a Pacific rim gas market and Australia’s big projects will not deliver the export value currently assumed, though all should proceed as planned. New projects are entering a very different pricing market.

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Comments

Actually this is a pretty big issue. I didnt realise the contracts for Australian LNG were linked to oil.

I can tell you it is something that has been raging for ages out of Russia where Gazprom has been supplying Europe for ages on contracts linked to the oil price.

As soon as the spot market arose and Europe started buying tanker loads of gas out of Qatar there were loads of customers with big fixed contracts not taking up contracted volumes, and has seen increasing pressure on Gazprom (hence the Russian state) to modify its contracting approach with considerable pain inside Gazprom (and revenues to Russia) – also including lots of political pushing and shoving which suppliers dont win.

The link was fairly logical in a world where energy was short but an abundance of gas (notwithstanding environmental effects of getting it in many cases) changes the field.

MB Fund

* Inception returns are per annum. The above returns include trading and investment costs but not administration fees. Note individual client performance will vary based on the amount invested, ethical overlays and the date of purchase. Past performance is not an indication of future performance.